This Dividend Stock Needs a Hit, but This Isn't It

Thank goodness. Eli Lilly (NYSE: LLY  ) is killing development of pomaglumetad methionil.

Last month, I called out the pharma as being a little schizophrenic about its schizophrenia drug. After it failed a phase 3 trial, there didn't seem to be much reason to push on with the drug.

Fortunately for shareholders, Eli Lilly has come to its senses. The pharma conducted a futility analysis on the second phase 3 trial in schizophrenics, concluding that a positive outcome was unlikely to result if the trial was enrolled to completion.

Eli Lilly was also waiting on a phase 2 trial testing pomaglumetad methionil in combination with atypical antipsychotics such as Johnson & Johnson's (NYSE: JNJ  ) Risperdal, Lilly's own Zyprexa, Bristol-Myers Squibb's (NYSE: BMY  ) Abilify, and Pfizer's (NYSE: PFE  ) Geodon, but that trial failed as well.

Investors didn't seem to be expecting anything less. Shares actually closed up slightly yesterday despite the bad news. In fact, Eli Lilly has had a couple of failures in the past week -- its Alzheimer's disease drug solanezumab failed two phase 3 trials on Friday -- but shares are up since before that news was released.

I think we can blame it on investor expectations -- Eli Lilly hasn't exactly been a research and development powerhouse lately -- and the power of dividends. A 4.4% dividend yield puts a floor on the price of the stock where investors figure it's worth buying even if there's very little capital appreciation.

That's a reasonable investment thesis for the short term, but it can't go on forever. Many of Eli Lilly's drugs are set to go off patent in the coming years. You don't need to be a CPA to figure out that lower revenue leads to lower income, which can result in the company not having enough cash to pay its dividend.

Fortunately, Eli Lilly has 11 phase 3 programs set to read out in the coming years. If it can get a couple of hits from those, the pharma should be fine. In the meantime, investors can sit back and collect the dividend.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson. Motley Fool newsletter services have also recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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